### POV: SHOULD MBS INVESTORS ALTER..........>

US MBS: ### POV: SHOULD MBS INVESTORS ALTER DURATION HEDGE MODELS/AND HOW WILL

THIS AFFECT TSYS/MBS?

- Fed Chr nominee Powell said Tues the $4.5 Tln Fed bal. sheet will be reduced

to $2.5tln to $3tln over the next 3-4 years as MBS reinvestments are gradually

reduced. 

- But what's most urgent now is the need for investors to re-evaluate

methodology used to hedge their MBS holdings. Most MBS hedges concentrated on

5yr part of yld curve as most MBS model duration were elatively short. But that

arose in a historically-low interest rate era since 2007-/08 Great Fincl Crisis.

- But it's a new era now. As US rates begin rising, hedging via 10-year duration

(not 5-yr) may make more sense. Durations shld extend: borrowers won't seek new

mortgages as rates rise: why take new loan with higher rate? 

- S-T IMPLICATION: Higher int.rates. If Tsy 10Y (now 2.381%) hits 2.60%, then

convexity hedge needs kick in.

- 2) L-T IMPLICATION: Hedge calculatns change as rates rise. This will PRESSURE

TSY intermeds as MORE/HEAVIER hedges done via TSYS/MBS SALES OR SWAP PAYING.